Investments

Simon and Jane are a young couple that have worked hard at their respective careers and have recently been promoted, significantly increasing their combined household income.  They have so far been accumulating their savings in an offset account, but they would like to explore more aggressive options to accelerate the growth of their personal wealth.

They speak with a ‘property specialist’ they found through social media who aggressively recommends they use the equity in their home to purchase an investment property using an investment loan. They are eager to proceed but their friend suggests they speak with a financial adviser before they proceed.

Simon and Jane meet with an adviser that carefully reviews their financial situation, goals and tolerance for risk, and they agree to a financial plan that revises the suitability of various investment options.

Their financial adviser then presents the plan several weeks later, recommending that Simon and Jane purchase a modest portfolio of Australian shares using an investment loan. The strategy will use dividends to meet repayments on the additional borrowings with any surplus income accumulating in their offset account. The strategy has significant tax benefits as the interest paid on the investment loan is tax deductible and the dividends from their portfolio have franking credits attached. The adviser has also prepared long-term projections of Simon and Jane’s financial position that show how they will benefit from the strategy and achieve their wealth creation goals as intended.

In developing the plan, their financial adviser also analysed the investment property strategy that was recommended by the ‘property specialist’. This was not endorsed for several key reasons:

• The loan used Simon and Jane’s home as security as-well-as the investment property to avoid Lenders Mortgage Insurance (LMI); however, this allows their bank to sell their home to recoup losses if they are unable to make their loan repayments.
• The rental property would actually cost them money as the rent would be less than the expenses; they also failed to plan for the property being untenanted, or changes to Simon or Janes income that may force them to sell at a loss.
• In the event of an emergency a portion of an investment portfolio can be sold to provide access to funds; however, you are not able to sell part of an investment property, the entire property must be sold.

After considering their options, Simon and Jane decide to proceed with their financial adviser’s plan and regularly review their strategy to ensure that it continues to align with their changing needs and financial circumstances.